Tuesday, 28 March 2017

In the second post today, the focus
will be on the news recently that two major shareholders in Tesco, the massive
retail company that engages in multiple avenues of business, have sought to
publicly express
their opposition to the company’s plans to purchase Booker, a wholesale
grocery firm, for a reported £3.7 billion. Whilst there are more elements to this
story which need to be discussed, the sentiment that is emanating from this
news, that shareholders are taking the long-term into account and not
succumbing to the destructive narrative of growth at any cost is the most
important way forward, is a very welcome sentiment indeed. Therefore, this post
will assess these details, and also the importance of this sentiment being
repeated in other arenas.

The attempted merger with Booker,
which was originally made public in January, was billed as a move which would
bring benefits to customers, retailers, and ultimately deliver ‘significant
shareholder value’. However, the deal began under a cloud of acrimony, with
non-executive Director Richard Cousins quitting
Tesco just before the news was made public, in a move we now know was
because he opposed
to Tesco buying Booker. However, that animosity reached a higher level yesterday
with Schroders, a renowned Fund Manager, and Artisan Partners, another large
Fund Manager – who, together, own 9% of the stock in Tesco – both calling for
John Allan, the Chairman of Tesco who was the focus of a recent
post in Financial Regulation Matters,
to pull
out of the deal as soon as possible. The shareholders have been reported as
labelling the move ‘foolhardy’,
and there is a notable reason for this.

Nevertheless, the sentiment and activism
displayed by Schroders and Artisan is a positive move. It is not positive
because shareholder activism is always positive, but because the managers of
these socially-central institutions must
be held to account at every turn – although there demise of Tesco is not even
on the table, a hypothetical understanding that if Tesco were to fail, it would
be the taxpayer that saved it, means that it is important that blind campaigns
of growth are kept in check at all times. We can see the reason for that in the
recent punishment by the Serious Fraud Office – companies that seek to expand
in this manner will usually transgress at one of two crucial junctures (and
sometimes both): either as they seek to expand; or as they seek to reduce the
consequences of their failure to expand. In Tesco’s case, the company purposefully and illegally overstated their profits, thus painting a better picture
to investors than was actually the case. Whilst this mode of operating is
usually attributed to large financial institutions, and quite rightly so, we
should be more than aware that it applies to all companies – the recent
post about the transgressions of Rolls-Royce, and now Tesco, should be
clear examples of this understanding. It is vital that shareholders do their
part for society and seek to encourage and insist upon sustainable and responsible
growth, rather than that demonstrated by Tesco under the leadership of Sir
Leahy.

Today’s
short post is concerned with the news yesterday that the Bank of England is
preparing to put the seven largest banks in the U.K. through an additional
stress test, in addition to the resilience test that is conducted annually.
The new test, which will examine the bank’s susceptibility to a number of
additional aspects, including persistently low rates and higher costs, will run
every two years and represents the central bank’s understanding that the
volatile environment that we currently inhabit needs to be reflected in the
stress tests. So, this post will focus on this new ‘exploratory’ test and
assess whether it goes far enough, and whether there are any shortcomings which
need to be addressed.

However,
there is one issue that reveals itself very quickly, and that is that we, as
the public, will not know the results of the test. This is for obvious reasons,
because it is logical to assume that the market would fall apart if it found out
that, conclusively, a number of large U.K. banks were ill-prepared to survive
an economic downturn. Yet, the largest banks have had difficulties passing the
annual stress tests in the past, so it stands to reason that if they failed at
the end of last year, they will fail again under this more rigorous test. RBS,
who, as we have previously
discussed in Financial Regulation
Matters is in a particularly poor state financially, emerged only last year
as the biggest
problem in the wake of the stress tests for 2016. Even though RBS’s
litigation costs contributed greatly to their poor position, the bank still had
to revise its capital plans to adhere to BoE standards because, according to
the parameters of the test, RBS would have suffered the second-largest ever
percentage fall in capital (only behind the Co-operative Bank in 2014) – once this
news was transmitted to the public, RBS shares fell 1.2% almost immediately).

In
terms of the test itself, there is a question as to what comes next. Usually,
the Bank of England will conduct
the tests and the target banks will respond based upon their financial position.
Once the bank responds as to how it would cope with the imagined conditions,
the BoE then rates the banks in terms of the measures that would be put in
place to remain in a positive stance, or at least how they would absorb the
negative aspects of the downturn and still remain viable. However, it is likely
that RBS, in particular, will fail this new test so spectacularly, that even
alluding to this will have a significant and negative effect upon its position.
Even though the results of the test will not be formally released, the business
press will find out somehow, and the results could be particularly damaging for
a bank that is still 73% owned by the taxpayer.

Ultimately,
the test is required, but comes with significant connotations. However, the
fear of the response from the market can never be an impediment to testing for
a bank’s resilience, so in this light the actions of the Bank of England should
be praised. Also, the fact that the issue of rising credit is being included,
and a review of this rise is being incorporated into proceedings is
particularly positive, because it was noted recently
in Financial Regulation Matters how
important this issue is to society, and it will also be discussed in an
upcoming article by this author as to how the rise in automobile financing is
creating an environment akin to that seen prior to 2007/8. Yet, there is more
to be done. This new move by the Bank of England should be accompanied by a
similar ‘stress test’ of the actions of all
financial regulators and how they would manage the situation, because the
financial crisis not only revealed the shortcomings of the regulated, but of
the regulators as well. The move to incorporate the results of tests without
revealing them to the public will likely not materialise, which will cause
problems – but it is hoped that the Bank of England will forcibly direct the
failing banks on how to proceed, rather than offer some friendly advice. One
banker reportedly stated, regarding RBS, that ‘it is
staggering they are still failing, we all know how much capital we need’ – it
is clear that the failing banks cannot be trusted to protect against a major downturn,
and that it will take an outside body to enforce that change in mentality;
hopefully, the Bank of England can play that role.

Sunday, 26 March 2017

This post is concerned with the
recent publication from the ‘Financial Exclusion Committee’, a committee that
was set up by the House of Lords to ‘consider
financial exclusion and access to mainstream services’. The report has
created headlines that allude to the poorest in Britain being excluding from
banking services, and ultimately being turned towards ‘high-cost
credit’ and ‘rent-to-own’
products, However, there are a number of aspects, some of which are particularly
vital for society, which emanate from this report and are worth considering.
Ultimately, the report suggests a number of reforms and, although advisory in
nature, strikes the right tone in terms of what is required to protect the vulnerable
in society as we rocket towards a new phase.

The report tackles a number of
issues in terms of what is being labelled ‘financial exclusion’. The first
aspects that we will look at revolve around the role of the banks within
society. The first recommendation that may have a major effect upon how
financial institutions operate is the recommendation that the Financial Conduct
Authority (FCA) should create rules which clearly set out the duty
of care that financial organisations should exercise towards their
customers. The committee discussed how, currently, the Financial
Services and Markets Act 2000 which, as the date suggests, was established
in the era that brought about one of the largest financial crashes on record,
established the principle that the FCA must have regard to ‘the general
principle that consumers should take responsibility for their decisions’.
However, the Financial Services Consumer Panel rightly noted that consumers can
only be expected to take responsibility if their actions were based on sound
and impartial advice which was based upon the very essence of exercising a
distinct duty of care – the panel concluded that forcing this issue should lead to a change in culture that
would see these institutions ‘take
their customers’ best interests into account at every stage of their engagement’.
This is the correct sentiment to have, but there is a qualifying understanding
that needs to be advanced before we get carried away with such endeavours, and
this will be advanced at the end of this post.

The next element of the Committee’s
recommendations that concern the banks’ behaviour is the issue of promoting the
right financial products to the right people. The Committee recommends that
banks should be compelled to promote
their ‘basic’ bank accounts – i.e. accounts that allow for a direct debit card
and access to cash machines, that allow for direct debits and standing orders,
but crucially do not allow for the
provision of credit in the form of an overdraft – because not doing so directly
leads to an increase in exclusion from the marketplace for those who lack an
understanding of the banking system, and for those who have little need for
more sophisticated products. It was discussed in the Press how the Committee
found that even branch employees were sometimes unfamiliar with their own bank’s
basic account offerings, with the Guardian suggesting that the main reason for
this is that banks make no money from providing these accounts – because they
cannot recoup funds via overdraft charges – and in some cases are making
a loss on their provision. However, it must be noted that since a government-led
initiative to increase access to ‘fee-free’ bank accounts in 2014, there has
been an increase in their provision, which is a good start and one that is
should be expected. It is to be expected because it was very much ‘expected’
that the British taxpayer would be there to provide security for the incredible
losses suffered by these very same institutions. However, there is still work
to be done, with an estimated 1.7 million people in the U.K. not having a bank
account, which in turn leads them towards ‘payday loan’ companies – the
committee found, most harrowingly, that 77% of those who used these firms in
2013 did so to pay
for food.

The social effect of this exclusion
makes for appalling reading for an advanced society, and the recent development
of the incredibly misguided notion of the need to develop a ‘shared
society’ – which is based upon the notion of moving away from the ‘social
justice agenda of prioritising helping the poorest people in Britain, and to
instead focus on those who live just above the welfare threshold’,
presumably because they may vote, should not inspire confidence. It was found
that more than a million people (40% of the working age population) in Britain
have less
than £100 in savings, that 2.6 million are struggling with severe problem
debt, that 8.8 million are showing signs of financial difficulty, and that
usage of rent-to-own as a means of purchasing has more than doubled in the last
five years to 400,000
households in Britain. There was also detailed research included in the
report concerning the specifics of those affected by financial exclusion, like
the fact that one-third
of those aged over 80 avoid using cash machines, which is an increasing
problem as it corresponds to the increased rate of branch closures in the U.K.
There was also an insightful and carefully considered investigation into the
links between financial
exclusion and mental health, with the report finding that there is a
two-way relationship between the use of financial services and mental health –
either by way of having a negative impact upon one’s mental health because they
are financial excluded, or by way of a person’s mental health affecting
detrimentally affecting their usage of financial services – neither of which
are adequately considered by those offering financial services. Martin Lewis
OBE discussed the idea of enforcing the option of providing ‘control
options’ for those that may need assistance in managing their affairs, and
this was rightly recommended by the Committee. The report also looked at the
issue of disability, and found that, rather incredibly in 2017, banks were
still not making reasonable adjustments for their customers, with stories of
customers who are registered
as blind being sent documents that were not in braille form, and contacting
those who suffer from hearing loss via telephone; the Committee rightly
concluded that banks need to do much more in this area.

However, before we look at the
qualifying conditions that must be applied to understanding the effect of the
Committee’s findings, it is worth looking at one very important, and often
overlooked issue – financial education. The Committee discussed the issue of secondary
schools not being monitored on their provision of Financial Education classes, despite
it being mandated in England (only) since 2014. Whilst the devolved nations
have incorporated the teaching of Financial Education into their curriculum,
often via Mathematics, England still lags well behind in the enforcement of
this push. Also, the Committee makes it clear that it wants to see Financial
Education taught earlier in the development of children, with the teaching of
financial education in Primary schools aiming to give children ‘life-long
skills’ that would be accentuated as they developed. This was discussed
further, with the Committee maintaining that it was important to have this type
of education represented at all levels, including further and higher education.
The Committee ultimately suggested that OFSTED should make monitoring the
provision of this element of education specific,
rather than classing it in general terms i.e. under the banner of ‘skills’.
They then suggested that providers of education should incorporate the teaching of financial education into their
programmes of study, as the 16-24 age group is particularly susceptible to making
financial mistakes in a period of their life where an vast array of financial
products are offered to them.

This cohesive and universal
approach to resetting the attitude towards financial exclusion is precisely
what is required. There is nothing to be said in opposition to the recommendations
made by the Committee – it is simply appalling that people turn to unscrupulous
lenders because of a lack of education in a supposedly advanced society. For
these recommendations the Committee should be praised, and it is genuinely
hoped that the movement they hope to inspire begins in earnest. However, as
with any discussion of the financial sector, it is important to take a
pragmatic approach to understanding the capability and potential for initiating
such changes. There have been a number of posts in Financial Regulation Matters which show that banks and other large
financial institutions are continuing
to transgress, despite being indicted in one of the largest financial crashes
on record. So, why would we believe that these same institutions would
proactively, which is what the Committee calls for, engage with the need to
exercise a duty of care to their customers – these are customers that are
extremely unlikely to garner any profit for the banks. It is therefore
important to recognise two interrelated aspects. Firstly, what we desire from these institutions and what
they actually are is a completely
different thing. We require them to be conscious, proactive, restrained, and
forthcoming in their citizenship i.e. offering fee-free services to those who
need it; yet, in reality they are organisations that only serve to create
profits for their owners and to do so irrespective of the consequences, whether
that be through dismantling the pensions of thousands of their employees – Philip
Green and British Home Stores - or by way of the banks and their conscious mis-selling
of insurance to the tune of billions upon billions of pounds; this is the
reality of the situation. The solution to these problems is to use the power of
the state to compel such actors, or
initiate real punishment for not doing so, but there is another element
currently developing which directly affects this potential solution. The
post-2016 world is rapidly altering the power balances between the state and private
entities. It is arguably unthinkable for the British Government to compel large
financial institutions to act in the best interests of its citizens at a time
when it is doing everything possible to stop
those organisations leaving its jurisdiction, and it is this understanding
that needs to be attached to the positive work undertaken by the Committee,
regrettably. These organisations, or even schools that are themselves under
intense pressure, will only initiate such forward-thinking and humanist
programmes if they are compelled, because the negative effects of doing so in a
world which is being defined by the acute pressures and the need to succeed at
all costs can cause irrevocable damage to their position; unfortunately, the
leaders of our society have deemed it more important to court the favour of
these entities rather than compel them to do anything – any forward-thinking
change can only be realised when that sentiment is reversed.

Saturday, 25 March 2017

Today’s post looks at the jostling
for position currently taking place within Europe in anticipation of the U.K.’s
and the E.U.’s negotiations over the U.K.’s secession deteriorating into what
has been termed as a ‘hard-Brexit’ i.e. an almost total separation from the
Union and the benefits that come with it. We have already discussed this jostling in Financial Regulation Matters through the lens of a battle between Paris
and Frankfurt, but Dublin is emerging as a very credible alternative to
those aspiring financial centres. However, there are consequences that come
with being the host of such vast but socially-dangerous institutions, and
Ireland’s recent history means that it is important to ask whether Ireland
should be making itself as open as possible to these organisations.

The debate about the jostling for
position between Paris and Frankfurt is well
covered in the financial press. Also, another issue that has been raised in
the press is that the propagation of jobs from London, if the right deal is not
struck during negotiations, is that there are different levels of jobs that
will be moved – with Poland being cited as being likely to be the
big winner when it comes to attracted mid-tier level banking jobs from the
U.K. However, for this post the focus is on the potential for Dublin to become
the main location for those fleeing London in order to continue their business
with the E.U., and it is fair to say that Dublin is a real competitor for this
potential influx. The obvious selling point of the city, to the employees of
these large firms at least, is the issue of language, with experienced
onlookers confirming that ‘the
attractions [of Dublin] are that it is English-speaking, has flexible labour
laws [and] the transportation links to the U.S. are pretty good’.
Furthermore, the fact that Dublin is home to major subsidiaries like hosting
the E.U. headquarters of Google, Facebook, Twitter, LinkedIn, and ‘more
than half the world’s leading financial services firms’ means that it
should already have the infrastructure, and also the culture, to accommodate the new arrivals. However, is this actually
true? There are a number of ways of viewing certain elements of Dublin’s ‘package’,
and not all are positive.

The Republic’s Minister for Foreign
Affairs and Trade recently discussed the post-Brexit issue, and described how
the country has people
in London drumming up support for Dublin’s ‘package’, with the campaign
being most built upon the facts that a number of leading companies are already
there, and that the low corporation taxes witnessed in Ireland would remain
low. However, this issue of Corporation Tax reveals the first of a number of
problems for Dublin’s ‘package’. Firstly, Ireland’s use of these tax rates and
tax incentives resulted in the headline-generating €13
billion fine for Apple (which
has yet to be resolved fully), which has potentially dented
the confidence large corporations have in investing in Ireland. This
perceived advantage over London may not even last, however, with Theresa May
hinting that Corporation taxes would be slashed
significantly in the event of a hard-Brexit. Secondly, there are doubts as
to whether Ireland can even accommodate an influx of workers (estimated
at 400,000 plus), because of a chronic
shortage of residences, both residential and commercial; it has been
suggested that there ‘just
isn’t space’ enough to see the London skyline replicated in Dublin. Whilst residential
rents may be cheaper in Dublin than in Paris, Frankfurt, or Luxembourg, the
shortage of homes and commercial buildings in Dublin is particularly
acute, and this would obviously be exacerbated with an influx of financial
services workers looking for certain types of properties based upon a certain
standard of living that they have been used to in London. However, these
practical elements are overshadowed by a much larger issue.

Ultimately, Dublin is a contender
in an arena that is becoming particularly ruthless by the day (with
Ireland officially complaining to the E.U. about the behaviour of its
competitors). There are advantages to moving to Dublin that would appeal to
big business, like the tax rates and sentiments displayed towards big business,
and this is being demonstrated by recent news regarding a number of important
expansions in the city. However, there are a number of disadvantages, which
include a lack of a ‘financial
ecosystem’ when compared to more established financial centres like
Frankfurt, the issue regarding housing and hosting this proposed influx, and
finally a shortage of ‘cachet’,
which is vitally important in respect to courting the business of
Middle-Eastern Sheiks or Russian Oligarchs, for example. But, it is contested
here that there is a much bigger problem, and that is the capability of Ireland
to protect itself from institutions that have the upper hand, just seven years
on from having to accept an €85 billion bail-out. These financial institutions,
rightly or wrongly, have seen their positions improve beyond recognition since
the U.K. electorate made its decision in 2016, and the institutions know it. If
they deem it necessary to move, which is certainly not guaranteed, then they
will have their pick of locations that are competing with each other for their
business – this imbalance of power puts the host location in grave danger, and
that danger is, arguably, far too great for Ireland to consider. It is
advisable to aim to host a proportion of the business that may leave London,
but this sentiment that Dublin will want to host the majority of the major
players leaving London is not, in reality, something that will happen. Nor
should it happen, because the Irish people will see their positions irrevocably
threatened, and it is for this reason, more than any other, that the fight for
the business leaving London is a straight fight between Paris and Frankfurt –
they, particularly Germany, are the only countries capable of hosting such
dangerous entities if they decide to leave the U.K.

Friday, 24 March 2017

This short post looks to understand
the current financial regulatory environment within China, because there is a
growing debate as to whether the decentralised and fragmented framework that
currently exists is capable of protecting the world’s second-largest, yet
arguably fragile
economy. The overriding call is to create a ‘super-regulator’ who would oversee
all the major elements of the Chinese economy; this is something worth
considering, but the recent calls for the People’s
Bank of China (PBOC) to take the lead may not be as optimal as it seems.
This post, therefore, analyses the problems facing the Chinese economy, and why
it has them, and ultimately suggests that a centralised financial regulator
would be the best option, but that there must be conditions attached to make it
effective.

Currently, within China, the PBOC
has a broad remit over the macro elements of the Chinese economy, but the
detailed elements of overseeing aspects such as banking, securities, and
insurance, are overseen by three different regulatory agencies (stemming from
moves between 1998 and 2003 to respond
to the increasing complexity of financial products and services). However,
in response to the ever-changing financial world, and how that may affect
China, there has been an increasing
chorus of calls to give more defined power to the central bank. These calls
are based upon understandings that each of these sub-elements of the regulatory
framework are facing extraordinary pressure from having to regulate unscrupulous
actors. The Chairman of the China Insurance Regulatory Commission stated that
insurers engaged in speculation would face severe punishments, ultimately
referring to those who operate outside of the welfare-creating mandates as ‘barbarians’.
The Chairman of the China Securities Regulatory Commission, Lui Shiyu,
described tycoons who unfairly profit from the stock markets as ‘financial
crocodiles’ and vowed to stop them sucking the ‘blood of the retail
investors’. The Chairman of the CSRC continued this colourful attack,
describing some private companies who seek to work around the rules as ‘poisonous
demons’. The reason for this influx is China’s moves to fend off the negative
effects of the Financial Crisis, which saw it incorporate an ‘era
of financial liberalisation’, represented by a massive financial stimulus,
an increase in the acceptance of novel and exotic financial products, and a
general lowering of regulatory oversight in the name of encouraging growth –
the result was obvious, with the collapse
of China’s Stock market in 2015 being rather inevitable.

So, in response to the general
increase in systemic risk within China, President Xi Jinping has made reducing
this risk a key
objective for 2017. This narrative is gathering pace, with the Governor of
the PBOC stating that ‘regulators
need to step up their coordination in scrutinising such products’, which
was further
consolidated by the leadership of the country. The increase in ‘shadow
banking-based lending’, which is notoriously under-regulated, is proving to
be a major concern for regulatory officials, and is beginning to prompt the
practical realisation of the aforementioned narrative, with the leaders of each
of the three regulatory agencies calling for ‘greater
cooperation’. This seems to allude to one understanding, because the
Governor of the PBOC is more interested in promoting the narrative that the
three regulators must do more, rather than depriving them of the ability to
regulate and transferring that power to the central bank – the only outcome,
therefore, is what is being dubbed a ‘super-regulator’.
This coalescing of the three regulators would provide a unified face to the ‘crocodiles’,
which can only be a good thing, in theory.

However, that theory may not
necessarily translate into practice. The SEC, which is responsible for large
swathes of the American Economy, is consistently
being criticised for a number of issues, ranging from a lack of meaningful
powers to the blight of the ‘revolving door’. The centralised Financial
Services Authority, the regulator in charge of the U.K.’s economy in the lead
up to the Crisis, was disbanded
and divided in the wake of the Crisis, mostly on the understanding that a
centralised regulator was not appropriate for the British market. So, there is
no guarantee that a centralised, all-encompassing financial regulator would be
suitable for the Chinese market, particularly when we understanding the incredible
pressures facing such a massive and expanding economy such as China’s.

Ultimately, if the leadership of
China introduces such a regulator, then it must be accompanied by substantial
powers. This narrative being developed by the leaders of the regulator
agencies, that the offenders are ‘crocodiles’, ‘barbarians’, and ‘poisonous
demons’, should translate into extensive powers to punish and make an example
out of those who seek to plunder markets and leave without consequence. On the
one hand, the single-party nature of Chinese politics makes this outcome
likely, because there are not competing economic ideologies at play within the
politburo (not on the surface anyway). But, on the other hand, the need to
continually expand and develop the Chinese economy exposes the Chinese society
to the iniquities of the marketplace which are a blight on Western Societies –
the need for Britain to ‘grow’ in the wake of its secession from the E.U., the
need for the E.U. to ‘grow’ without the power of the City of London, and the
need for the U.S. to ‘grow’ on the back of its voting for protectionism, leaves
all of these globally-vital societies at the mercy of the venal. Finding that
balance between the need to grow and the need to protect for the future is the
defining dichotomy of our time.

This very short post aims to take a
brief look at the recent news that Credit Suisse, the large banking entity that
has a substantial presence in a number of key markets, have recently increased
the amount that it will pay in bonuses, increasing
its bonus pool by 6% which is represented by a total figure of £2.5 billion.
However, for a firm carrying the negative reputation that Credit Suisse is
currently carrying, this seems to be an exorbitant increase at a time when its
competitors, who are similarly experiencing incredible amounts of negative
publicity, have cut their bonus pools significantly – Deutsche
Bank cut its 2016 bonus pool by almost 80%. This move by Credit Suisse represents
either one of two things; either it shows the need to retain talent by way of
increasing the remunerative package being offered, or it shows the disregard to
those affected by Credit Suisse’s poor practices. Once again, the notion of ‘perception’
proves to be central here.

As a result, the bank posted a £1.9
billion net loss for 2016, which means that the bank is now in its second
consecutive year ‘in
the red’. To counter the effects of the downward turn, the bank announced
in February that it would be cutting 5,500 jobs in 2017, which comes on the
back of 7,250 job losses in 2016. This push is part of CEO Tidjane Thiam’s restructuring
plans to move the bank towards
wealth management and away from investment banking. However, today’s news
that the bank is increasing the bonuses of those involved in this degradation
of the bank’s reputation must surely be particularly unpalatable to those who
have lost their positions. The bank argues that having ‘experienced
key employee retention issues’ in the first quarter last year, after
slashing remuneration packages, the increase in bonus packages would ‘ensure
that employees who meet their performance targets could be compensated in line
with the market’. This may be true, but the market is also demonstrating
instances of employees being denied this opportunity because their performance
simply does not warrant any extra remuneration – therefore, we must take it
that Credit Suisse believes its employees to be worthy of such an increase.

It is this understanding, when
understood in comparison to the continued
transgressions of the bank, not just the incredibly poorly-worded ‘legacy’
issues (which has been discussed
previously in Financial Regulation
Matters), which means that Credit Suisse is actually rewarding poor
performance, simply because of the fear that the employees they have will leave
to their competitors. This balancing act that financial institutions must
perform, in terms of compensating their employees but also having to be seen to
be operating in the interests of their shareholders and stakeholders, is a
reality facing most financial institutions. However, there is a great risk, particularly
in this current climate, in rewarding those who cause damage in their
marketplace – that risk can be categorised under the banner of ‘perception’ and
the effect that any real loss in reputation may have. The news that the leaders
of the firm are having their pay increased on the back of massive fines for
misinformation, fraud, and facilitating tax evasion, adds to a growing
narrative that these institutions’ actions over the past 15-20 years is not an aberration,
but is representative of their culture; if that narrative continues to grow,
institutions that continue to disregard this important element of ‘perception’
may regret it dearly.

Tuesday, 21 March 2017

Yesterday, the Guardian Newspaper
in the U.K. broke the story that a gigantic money-laundering operation, dubbed
the ‘Global
Laundromat’ had included a number of leading banks, amongst which was HSBC.
This short post will look at how the mentioning of money laundering is becoming
almost analogous with the mentioning of HSBC and that, ultimately, the bank is in danger of facing the greatest threat that a bank can face - an irreversible loss of its reputation.

HSBC has a long association with facilitating
the illegal flow of money, either from illegal sources or via tax evasion. In
2010, the bank was ordered by the Federal
Reserve to improve its money laundering procedures. Then, as was discussed
in a previous
post in Financial Regulation Matters,
the bank was fined $1.9 billion in 2012 by U.S. authorities for ‘exposing the
U.S. financial system to money laundering’. This was predicated upon a damning
investigation led by Senator Levin of the U.S. Senate, that systematically
described how HSBC has consistently performed particularly poorly when it comes
to preventing the flow of money from criminal organisations, banned entities
and countries, and terrorist organisations. In 2013 Argentina
initiated criminal charges against the bank for facilitating tax evasion
and money laundering, and in 2014 an independent compliance monitor stated that
the bank had ‘much
work’ to do in terms of fortifying its Anti-Money Laundering (AML) procedures.
Yesterday, the story continued with the news that of the billions of dollars
emanating from Russia and Eastern Europe, HSBC processed at least $545.3 million. Whilst HSBC was not the only bank indicted
by these reports (RBS processed $113 million, Deutsche
Bank $300 million, Citibank
$37 million and Bank of America $14 million), this repeated association
with money laundering is approaching terminal for the bank.

The calls from opposition MPs
should be enough to initiate an effective investigation into how British banks
became part of this international system of moving illegal money. There is a
defence to be had for HSBC, that their operations are so global, and so
extensive, that it is almost impossible to effectively guard against such sophistication.
This may be true, but there is a bigger issue – HSBC is close to becoming synonymous
with money laundering, and that could be particularly dangerous for the bank’s
future. The issue of ‘perception’ has been discussed on a number of occasions in
Financial Regulation Matters, and
that is because, quite simply, the financial system must be seen to be working, even if under the
surface all is not well. The infamous Bank of Credit and Commerce
International, much better known as BCCI, is a case in point for the new
Chairman of HSBC, Mark
Tucker, who was appointed last week. BCCI is rightly remembered as being so
intertwined with illegality that it was colloquially referred to as the ‘Bank
for Crooks and Criminals’ and, arguably, Tucker’s job is to make sure HSBC
does not become BBCI mark II. Mark Tucker was hired because of his successes in
Asia, with the obvious intent being to expand HSBC’s operations in that
continent. However, it is far more important that HSBC turns its attentions
inwards, rather than looking to continuously expand – any expansion will make
the process of eliminating these AML failures even harder, not easier, and that
may prove to be a terminal error for this massive bank. It is likely that the
$543 million figure quoted by the Guardian will steadily increase as investigators
seek to understand the extent of this global scheme, and with every increase in
that figure HSBC becomes exposed to the greatest threat that a bank faces – an irreversible
loss of its reputation. Mark Tucker’s job has just become much harder, and he
has not even officially taken over yet (that will happen in October of this
year).

Monday, 20 March 2017

Today’s post provides for updates
on posts from last month in Financial
Regulation Matters, as recent news has suggested that there are particularly
important developments looming. Firstly, the post will look at the developments
being undertaken by Lloyds in response to the fraud undertaken by Lynden
Scourfield, via Halifax Bank of Scotland (HBOS). Then, the post will provide
updates on the new wave of warnings being aimed at executives in receipt of
large pay packages. Lastly, the post will provide a passing comment on the
recent, undeniably brash warnings given by the Chairman of Barclays to Theresa
May.

Lloyds’ Griggs Review

On the 6th February, the
case of six financiers being jailed for almost fifty years was the target of a post
in Financial Regulation Matters. The
financiers, led by the head of the Corporate Division in HBOS Lynden
Scourfield, conspired against the owners of small and medium sized enterprises
(SME) – the scheme was to funnel the business into the hands of Scourfield’s
division, enforce the acceptance of increased levels of finance (often without
merit), and then pick up the pieces for a fraction of the true value once the
businesses inevitably collapsed under the fabricated pressure that increased
financial pressure brings to such companies.

So, in response to the claims by
those affected that they have spent years attempting to have their claims taken
seriously, and in response to the recent convictions of course, Lloyds has now
commissioned Professor Russel Griggs
to lead a review into the cases of those affected. The bank says that it has
selected Professor Griggs to lead the independent review because of his ‘experience
in overseeing high profile reviews of a complex nature and for his clear
understanding of SME businesses’, which is based upon the Professor’s
appointment as an External Reviewer to the SME
appeals process in 2011 which ensured that SMEs were provided with a fair
and transparent appeals process whenever they were denied credit. The bank
continues by confirming that the customers who have been identified as being
affected will be included within the review process, and those that have claims
to be affected will be consulted shortly and a decision made as to whether they
should be included in the review. The news cycle has rightly opined that the
recent successes of Lloyds, as detailed in a previous
post, should not become a reason to shirk responsibility and sweep
issues like this under the carpet and this, arguably, cannot be doubted.
With banks, it is vital that we judge them by their actions, and not how we
would prefer them to act, because the divergence puts society at a distinct disadvantage
– it remains to be seen what the outcome is regarding the compensation awarded
to those affected by this despicable fraud, but Professor Griggs’ appointment
to an independent review is an encouraging start.

Executives Warned Again Ahead of AGM Season

On the 9th of February,
the focus of Financial Regulation Matters
was on the warning from leading British institutional investors that the
forthcoming Annual General Meeting (AGM) season would be characterised by an ‘increased
amount of investor-activism when it comes to executive pay’. The post
looked at the instances of Imperial Brands, the massive tobacco company forced
to scale back its plans for an increase in the remunerative package for its
CEO, and also the pressure being exerted by Church-led groups against energy
giants BP and Shell in terms of improving its environmentally-concerned
actions.

Today, in the Guardian, the Chief
Executive of the Investment Association described how the number of companies approaching
the Investment Association – an association of institutional investors,
investors like pension funds, that have binding voting power to veto the pay
packages being put forward for management teams – has
more than doubled in the past six months in advance of this coming AGM
season; the companies know that the power to veto or confirm the pay packages
for the next three years is now stronger than ever before and that the flag-ship
sentiments offered by the Prime Minister – namely that she would lead a
crackdown on executive pay abuses – have only increased the pressure on them to
justify the pay increases. Chris Cummings continues by stating the focus of
investors this AGM season will be on three key components: pay and future
increases; the structures of those awards and the need to simply them; and
finally the link between pay and performance. If this tripartite approach is
realised, then the effects may be particularly beneficial for holders of
pensions up and down the country.

There is a distinct need to proactively monitor the actions of
companies who only exist to create profit. The current environment is slowly
developing into one that is fertile for abuse (as will be discussed next), so
it is vitally important that someone with influence takes the leading role in
doing so. As will be discussed next, there is a growing concern that regulators
will be hamstrung in their ability to do so because of external pressures, so
perhaps that societal protection can come from pension funds who have the power
and influence to direct the actions of the largest institutions in society.
That state of affairs is unnerving, because we are then trusting private institutions
with the regulation of private institutions when it is the public who will bear
the biggest brunt – however, in this post-2016 world, it may be best
opportunity we have. The results of AGM season should be followed particularly closely
this year as a result.

Pressure Grows on Theresa May to Open the Gates for the Venal

It was discussed on the 5th
of February in Financial Regulation
Matters that Theresa May, the British Prime Minister, was facing an era-defining
predicament in terms of choosing to focus upon the short-term successes of
the country in response to the decision to leave the European Union, or whether
she would use the opportunity to institute lasting financial practices that
would protect the British people and lead the way in terms of corporate
governance. It was opined that the pressures facing the U.K. after it secedes
from the E.U. would be too great, and those that have the capability to exert
pressure because of their importance to the British economy i.e. banks and
other large financial institutions, would be far too great. Today, that opinion
was ratified by the Chairman of Barclays.

It is very likely that Paris and
Frankfurt will now seek to demonstrate how friendly they can be to these
massive financial institutions if they are to leave the U.K., as was discussed
in a previous post. However, there is little to suggest the French or
German governments will bow to the excessive demands of these institutions to
facilitate the firms’ movement to their capitals – their citizens will be put
at risk just like the British will be if the British government bow to the
demands. Not only is it the case that London
will undoubtedly remain a location for high finance, but these statements
by McFarlane have had an unintended consequence, hopefully. What his comments
show is the irrepressible venality that the largest financial institutions have
incorporated into their very fibre. Yes an institution must seek to advance its
own interests above others – this is logical and rational – but this uncompromising
push to destroy everything in their way for the purpose of short-term gains is
remarkable, clear, and something that needs to be addressed and repressed as
much as humanly possible. It is vital that the British government respond to
these threats with the vigour with which they were uttered – whether they do so
remains to be seen.

Saturday, 18 March 2017

This post focuses upon a piece in
the news cycle last week that ran with the headline ‘Student
digs in Britain giving first-class returns’. The content of the piece
concerned an increased influx of big business into the student accommodation
market in the U.K., which has ultimately brought serious international players
like Goldman Sachs and UBS directly into the realm of Higher Education. The
focus of this post will be to detail this influx and to look at some of the
possible connotations of this increase in profit-driven characters now associating
themselves with an arena that is fundamentally based upon educational growth,
rather than the growth of a profit margin.

This week saw the massive Mipim Property conference take place in
Cannes, France. The conference, which is held every year and draws developers
from around the world, is also a forum at which government ministers attend to ‘promote’
their approach to developers in their given countries. This year was no
different, and the U.K. Housing Minister, Gavin Barwell, was on hand to deliver
Theresa May’s personal message to the patrons of the conference: ‘attracting
investors to the whole of the U.K.’s real estate would be a key driver of the
U.K. economy in the post-Brexit world’. Previously
in Financial Regulation Matters, the
focus was upon the predicament facing Theresa May regarding the pressure she is
subjected to in terms of surviving the secession from the E.U. in comparison to
the needs to look after the country’s long-term interests, and this ‘open for
business’ mantra is, arguably, a clear indicator of where Theresa May has
determined her efforts should be concentrated. Whilst it seems rational that a
Prime Minister will want to develop as many trade and business links as
possible in preparation for the secession, there is an overriding risk that the
understanding of that weakened position exposes the country to the most venal
in society, and it is upon that basis that this news of increased investment
into student accommodation should be viewed.

Last year alone, institutional
investors, like wealth fund managers and pension funds, invested
more than £4.3 billion buying over 50,000 student rooms in the U.K.
Research suggests that the value of the contracts awarded to construction firms
applying for the opportunity to satisfy this demand totalled more than the
value of contracts awarded for care homes, housing association housing, local
authority housing, and sheltered housing combined.
UBS, the Swiss banking giant that was fined $1.5 billion in 2012 for fraud, and
who are consistently fined almost every year for malpractice, recently paid £31
million to buy a 184-room hall from Imperial College London, whilst also
purchasing property in Newcastle, Durham, and Belfast. Goldman Sachs, another
banking giant who is consistently fined for its behaviour, holds a
majority stake in a group which owns 23,000 student rooms, whilst a Canadian
pension fund spent £1.1 billion buying Liberty Living, a company that runs
more than 40 student properties with a grand total of 16,000 rooms within 17
cities across the U.K. However, the British market is drawing so much
attention, the market is beginning to saturate – this has resulted in a
concerted effort to apply the same financial interest to Continental Europe,
with research suggesting there is up to €5
billion to be invested over the coming few years – although the mitigating
factor in this lack of application is a ‘lack
of supply’, which takes us onto a much more important issue.

Whilst there will be those who
champion this influx, like those in the recent news article who stated that it
is the parents of students who are driving this supply, and that what students
require in this generation are purpose-built,
more homely examples of student accommodation, there is a much more
worrying element at play. To begin with, the ever-increasing student
population, which research suggests now stands at a record 2.28
million students studying within Higher Education institutions, are not
only paying more in
tuition fees than ever before – the increase to £9,000 a year (and rising) has created
a surplus
of nearly £2 billion across the sector – but are also being charged more in
rent than ever before. Research suggests that there has been a 23%
rise over the past five years in the average cost of student accommodation rent
in purpose-built properties, which unsurprisingly led to student demonstrations
outside the conference in London last year.

Ultimately, there will be many who
champion this influx in investment. The benefits of cleaner living, collegiate
environments, and arguably safer environments which will appeal to the parents
of students, are clear to see. However, we must take a much broader view of
this situation. The commercialisation of education cannot be denied, and this
is now being recognised by the most venal entities in the world. Institutions
like UBS and Goldman Sachs exist only
to make as much profit as humanly possible, irrespective of the unethical and
anti-humanist effects of their actions – this mentality should not be allowed
anywhere near education. Yet, it is. Not only is it being allowed near Higher
Education, the bastion of societal development, but it is being actively encouraged by a Government that is
seemingly hell-bent on internalising the pressures that are being associated
with seceding from an economic bloc. However, there is no evidence that has
been conclusively advanced that this ethical abandon is even required because of the impending secession, which
makes the actions of the Government even more distasteful. What is required now
is an extremely strong-minded and forward-thinking regulator, or Parliamentary
Committee, to examine this influx and ask whether it should be curtailed. The
associated risks are clear: the inclusion of these venal monsters, who impart
pressure on everyone they are involved with (as was clearly demonstrated by
their actions in creating the Financial Crisis), places Universities in grave danger –
the pressure to recruit more and more students, irrespective of whether that
particular route is correct for their, and the institution’s development, is a
natural knock-on effect of the influx of these venal institutions. It is vital
that someone who has the power to intervene observes this trend and seeks to
examine whether this pressure is, or is likely to be exerted – the development
of future generations depends upon it.

Friday, 17 March 2017

Today’s post offers a short roundup
of the day’s business news, and focuses upon the stories of George Osborne
taking up the position
of Editor of the London Evening Standard Newspaper, and of the news that
former Barclays Chief Bob Diamond is returning to the City of London by
purchasing the venerable British Broker Panmure
Gordon.

In a previous
post in Financial Regulation Matters,
the focus was on George Osborne’s monetising of his previous position as
Chancellor of the Exchequer, mostly by way of his new role with the giant
investment firm BlackRock which will see Osborne pocket £650,000 a year from
that role alone. It was discussed that Osborne is embarking upon a conscious
and concerted campaign to turn the influence that he wielded as the architect
of austerity into considerable compensation, and the next stage of that campaign
was revealed today. It was announced that Russian Billionaire Evgeny
Lebedev has installed Osborne as the Editor of the London Evening Standard
Newspaper. Whilst his salary has not been revealed, it is logical to conclude
that it will be much more than his £75,000 salary he receives as an M.P., but
in truth it is the influence that he can now wield and the fact he is a current
sitting Member of Parliament that has attracted
the headlines today, with one newspaper suggesting that the position gives
him the basis to seek ‘revenge’
for the undignified way he was side-lined upon Theresa May’s arrival at the
helm. Nevertheless, what is clear is that the title of the previous post – the art of monetising your position – was an
incredibly apt moniker; Osborne is demonstrating, in the truest possible sense,
what can be done when you are willing, in an almost Faustian
manner, to ‘call in your chips’. Osborne’s tenure at the helm of the Evening Standard
will surely be an interesting one.

Bob Diamond Returns to the City

In 2012, Bob Diamond resigned from his
position as CEO of Barclays Bank in light of the rate-rigging scandal that
engulfed the British bank. The bank, under his stewardship, had consciously sought
to manipulate the LIBOR rates, a rate which essentially acts a benchmark for a
range of financial deals and can be recognised as a ‘measure of trust in the financial
system’; the bank was ultimately fined
£284.4 million by the Financial Conduct Authority and over £1.5 billion
when fines to other regulators were totalled. After 15 years with the bank, and
only 18 months as CEO, Diamond, who had rose to prominence because of his work
with Barclays’ investment divisions, left after extreme
pressure from external forces, including the now-defunct Financial Services
Authority and the Bank of England, and ultimately left the City as a result. However,
today, he meekly returned.

Diamond, as part of his buyout
vehicle Atlas Merchant Capital, has teamed up with QInvest, investment vehicle
for the Qatari Royal Family, to purchase
the stricken stockbroking firm Panmure Gordon in a move which values the firm
at £15.5 million. Whilst the sums involved are low for players of this calibre,
the return of Bob Diamond from the wilderness, at the same time we are
expecting Theresa May to trigger Article 50 and begin the formal secession from
the E.U., will be a welcome shot in the arm for British politicians who are
keen to promote the health and future of the City in response to the manoeuvrings
in Paris and Berlin, as was discussed in a previous
post. However, the analogy that circling sharks are rarely a positive sign
can be attributed here – Diamond has demonstrated, even admitting
before committees, that he actively engaged in unethical practices to promote
the financial health of his companies and, ultimately, his own position;
Diamond’s return then, unfortunately, adds fuel to the theoretical fire that
the decision to leave the E.U., rightly or wrongly, will coincide with the
reduction in supervision… it is hard to believe that Diamond’s reappearance is
purely a coincidence. There is an extremely limited amount of impact he can make at such a small firm, but his quiet reintroduction to the City represents the opening act of a story that is beginning to build and build and which may not have a happy ending.

Thursday, 16 March 2017

Today’s short post looks at the
case of Wells Fargo and how it has responded to the scandal that saw it fined
$185 million for fraudulently opening up to 2 million accounts, on the
basis of extensive pressure from the very top of the company to hit quotas – with
its now former CEO John G. Stumpf famously developing the mantra of ‘eight
is great’ meaning that each customer should be hold at least eight Wells
Fargo products. However, recent news suggests that investors in the massive
bank are starting to mobilise in order to affect some sort of positive and
responsible change, a development witnessed in the U.K. recently as well, as
alluded to last
month in Financial Regulation Matters,
but this post will suggest that the chances of affecting that change are slim
and that, ultimately, how Wells Fargo responds in reality will be a clear
indicator into the power of the institutional investor.

The scandal which hit Wells Fargo
recently, despite Warren Buffett’s (a major investor in Wells Fargo) brazen but
perhaps accurate assessment that the damage is not ‘material’,
has generating an enormous amount of publicity. Essentially, in attempting to
respond to incredibly coercive demands from the leaders of the bank, up to
5,300 employees engaged in a systemic approach to manufacture sales, which
included creating fake email accounts to sign up customers for online accounts,
sham accounts, and even
issuing credit cards to customers without their consent. The damage then
spread, with four
executives being fired in connection with the scandal, and then the
executive responsible for the culpable division and then the CEO leaving their
positions and facing attempts by the bank to ‘clawback’
the compensation that they left with, which accumulated to over $60 million
between them.

This has led to major institutional
investors, including those representing religious
institutions, to seek to pressure the bank to seek to investigate the ‘root
causes’ of fraudulent activity and to commit to a ‘real,
systemic change in culture, ethics, values and financial sustainability’.
However, the bank has responded by declaring that a report will be made
available next month and this it has already taken ‘decisive steps’, which
including the dismissals mentioned above. However, the bank is still continuing
to suffer from the scandal, with losses at the end of 2016 coming at 4.3% lower
than before, and a reduction in contact with customers in most areas including
credit card applications and the opening of checking accounts (although
deposits and debit card spending did increase).

So, in essence, Wells Fargo
represents a classic dichotomy in terms of moral-based institutional investors
attempting to initiate change by way of capitalising upon poor performance, and
a dominating and influential core i.e. Buffett, who believe that the damage is
temporary. Also, the calls by investors to initiate a root-cause investigation
of fraud and immoral behaviour in the firm essentially walked out of the door
with millions in his pocket – the case of Wells Fargo differs from other
financial scandals because the line of command, in terms of setting the
culture, is particularly clear. The mass dismissals were regarded as a positive
step, but in reality it has made it much harder to punish wrongdoers and make
an example of them; it is very unlikely those that committed this fraud will
ever be brought to justice. There are signs that the leaders and nurturers of
this culture may not get off so lightly, with leading senators calling
for action, but it remains to be seen as to whether the current political
climate in the U.S. is fertile ground for corporate prosecutions. What is for
sure, though, is that the dismissals at Wells Fargo do represent a ‘decisive
step’, but potentially in the wrong direction; it is now important that those
responsible are prosecuted for their crimes, but it is advisable not to hold
your breath.

Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.